Period

1Q16

Actual vs. Expectations

1Q16 slumped into the red with a loss of RM19.7m compared to our and consensus fullyear forecasts of RM277m and RM330m, respectively. The negative variance from our forecast is mainly due to lower-than-expected contribution from the automotive segment.

Dividends

No interim dividend was declared. Key Result

Highlights

QoQ, 1Q16 revenue declined 8% to RM2.9b due largely to lower contribution from automotive (- 12% QoQ) which more than offset better performance from Services (+6% QoQ) and property (+15% QoQ) divisions. Specifically, in the automotive segment, lower volume sales was led by Proton (-19% QoQ) followed by Suzuki (- 35%) and Mitsubishi (-45%). Pre-tax profit in 1Q16 fell 63% to RM16.7m, largely driven by 34%-owned Honda. Due to the losses at the automotive division of which Proton accounts for 70-80%, 1Q16 registered a loss of RM19.7m compared to a profit of RM89.9m in 4Q15. Interestingly, losses at Lotus narrowed by 8% QoQ.

YoY, 1Q16 revenue declined 21% due mainly to lower contribution from automotive (-22%). Proton continued to disappoint with negative sales growth of 26% bringing total sale units to 22.5k in 1Q16. Solid Honda sales boosted associate contributions by 25.7% YoY. Due to the losses at automotive division of which Proton accounts for 70-80% and lower contribution from services (-15% YoY), 1Q16 registered a loss of RM19.7m compared to a profit of RM107.8m in 1Q15. Surprisingly, losses at Lotus narrowed by 40-50% YoY.

Outlook

Earnings contributions are expected to come gradually from the RM7.55b AV8X8 contract while the property division is expected to contribute positively from the launching of property projects. However, Proton is seen to continue losing market share with the automotive division dragging down earnings.

Change to Forecasts

We cut our FY16E net profit by 25% due to the poor set of results.

Rating & Valuation

Due to the erratic quarterly earnings uncertainty, we are attaching a 35% discount to SoP. Correspondingly, we downgrade our SoP derived target price from RM1.81 to RM1.40. Maintain Market Perform.

Risks to Our Call

Upside risk: Better-than-expected performance in the automotive division.

Source: Kenanga Research - 28 Aug 2015